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Profit Improvement Report dynamic pervasive throughout the economy that tends to relate sales growth and payroll growth. Part of this is a tendency to pay employees for breathing. As long as employees continue to breathe each year, they continue to receive pay increases. The most serious aspect of the philosophy of sales-based planning is that management does not have realistic parameters for actually improving payroll performance. Without them, it seems inevitable that the no-improvement trend of the past will continue in perpetuity. A new planning perspective is essential. Exhibit 1 The Impact of Various Sales and Payroll Growth Scenarios For the Typical AED Member Income Statement--$ Net Sales Cost of Goods Sold Gross Margin Payroll and Fringe Benefits All Other Expenses Total Expenses Profit Before Taxes Current Results $35,000,000 27,475,000 7,525,000 4,025,000 2,870,000 6,895,000 $630,000 5% Payroll Growth 36,750,000 28,848,750 7,901,250 4,226,250 3,013,500 7,239,750 $661,500 Income Statement--% Net Sales Cost of Goods Sold Gross Margin Payroll and Fringe Benefits All Other Expenses Total Expenses Profit Before Taxes 100.0 78.5 21.5 11.5 8.2 19.7 1.8 100.0 78.5 21.5 11.5 8.2 19.7 1.8 ---5% Sales Growth--3% Payroll Growth $36,750,000 28,848,750 7,901,250 4,145,750 3,013,500 7,159,250 $742,000 100.0 78.5 21.5 11.3 8.2 19.5 2.0 7% Payroll Growth 36,750,000 28,848,750 7,901,250 4,306,750 3,013,500 7,320,250 581,000 100.0 78.5 21.5 11.7 8.2 19.9 1.6 Actually Bending the Curve The fundamental necessity in bending the Change in Profit--% 5.0 17.8 -7.8 curve is that sales must grow faster than the payroll expenses required to generate those sales. Payroll does not just include wages alone; sales must a result, profit actually fell by 7.8 percent. In short, even increase faster than fully loaded payroll expenses ��� includmodest changes in the size of the sales-to-payroll wedge ing all salaries, commissions, bonuses, social costs (Mediproduce large changes in profit levels. care and FICA) as well as health insurance and retirement, The entire discussion has focused on planning for a usually a 401(k) program. positive sales-to-payroll wedge. It employed a 2 percent The concept of increasing sales faster than payroll is delta, which is a realistic planning goal. However, planwhat is commonly called a sales-to-payroll wedge. Astute ning for improved results and generating them are two readers will remember that the author has hounded them different things. on this concept before. Since payroll costs continue to rise The key in actually producing a positive sales-to-payroll in tandem with sales, the author is dedicated to hounding wedge continues to be a careful analysis of transaction once again. economics. That is, the same level of sales volume can Exhibit 1 demonstrates the impact of the sales-to-payroll produce very different profit levels, depending upon the wedge on the typical AED member based upon the latest amount of work required in each transaction. CODB Report. As can be seen, the firm generates $35 Two key factors have always been important in transacmillion in sales, operates on a gross margin of 21.5 percent tion analysis. The first is the number of line items sold of sales and produces a bottom-line profit of 1.8 percent per transaction. The second is the average line value. A of sales, or $630,000. system that measures these factors and then uses them in Three different scenarios are presented in the table. They planning can go a long way toward actually producing a all involve sales growth of 5 percent. This modest growth positive sales-to-payroll wedge. rate was chosen specifically to demonstrate that rapid growth is not needed to drive higher profit. What is essenMoving Forward tial is payroll control in relationship to that sales growth. Sales growth must be maintained at a level that allows The first scenario has payroll increasing at the same 5 the firm to produce a sales-to-payroll wedge of something percent level as sales growth. In essence, this is a microin the 2 percent range. With such a delta, the long-term cosm of what has happened among AED members over challenge with payroll control can finally be overcome. time. Some years, payroll grows faster than sales, other With even modest sales growth, higher profits will become years the situation is reversed. Over time the two factors a reality. n move forward together. Profit is up 5 percent. Dr. Albert D. Bates is founder and president The second scenario examines the impact of achieving of Profit Planning Group. His latest book, Triple a 2 percent sales-to-payroll wedge. Specifically, payroll Your Profit!, is available at: www.tripleyourprofitincreased by 3 percent while sales grew by 5 percent. book.com, as well as Amazon and Barnes & Noble. The impact of a small one-year delta is dramatic. Profit is It includes Excel templates for understanding and increased by 17.8 percent. Further, profit is now 2 percent building the sales-to-payroll wedge discussed here. of sales. ��2012 Profit Planning Group. AED has unlimited duplication rights for this manu The last scenario presents the impact of a negative script. Further, members may duplicate this report for their internal use in any way sales-to-payroll wedge. In this instance, payroll grew by desired. Duplication by any other organization in any manner is strictly prohibited. 7 percent in conjunction with 5 percent sales growth. As April 2013 | Construction Equipment Distribution | www.cedmag.com | 45 44_Bates_Profit_Feature_KP.indd 45 3/25/13 12:25 PM